Green Lending

July 14, 2008

By Fredric Prohov
When it comes to innovative capital finance, Americans are still among the most creative in the world to figure out how to quickly move large sums of money to where it needs to go. As the costs of energy soar, economic forces are teaming up with shifting social demands that are already affecting how real estate projects will be designed, built and financed. Green finance programs are slowly emerging to fund real estate projects that will address the need to change the built environment for a more energy-conscious public.

The cost of gasoline has soared past $4.00, and it looks like $5.00 per gallon might be on the horizon. It is clear why more people are taking a closer look at hybrid cars. The comparison for cost savings when one vehicle can get up to 60 miles per gallon and the other only 10 are dramatic. The greater energy efficiency from driving a new hybrid car will immediately result in dollars saved to pay for the cost of the new car over time compared to the dramatic higher cost of driving a SUV.

One can make the same case for the energy we use in our homes. When it comes to getting a buyer to qualify for a home mortgage, an energy-efficient home with lower utility costs would result in monthly cost savings and higher net income to pay the mortgage loan being sought for the buyer. When the swing back occurs, builders will be building tighter, greener homes that will reduce energy costs immediately. Existing homes can also be made more energy efficient with improvements. If a home can achieve a demonstrated $200 per month or more in savings on utility costs, the market will direct consumers to seek out energy-efficient homes as opposed to conventionally-built homes that do not consider the impact from those higher costs. As the cost of running HVAC systems continues to rise, the comparison in utility bills for different homes will start to look like the choice between the hybrid and the SUV.

Some lenders are beginning to recognize these factors and will be able to assist a buyer to find greater loan proceeds if the home they want to buy qualifies for what has been known as an Energy Efficient Mortgage (EEM). After a few slow starts, these programs have not surfaced much yet because there have not been enough inventories of qualifying homes that meet the profile. Like the increased interest in hybrids, the next cycle of construction will provide a greener volume of product for this type of home financing that is developing, but still largely remains in the wings. One of the country’s leading sources for funding such loans can be found at myEnergyLoan.com. Jeff Cole, owner of myEnergyLoan Inc. out of Atlanta, sees it this way: “Changes in antiquated zoning and building codes are being modified to encourage the greener standards being adopted in California and other states and municipalities around the country.” Among those standards is the new LEED for Homes standard from the United States Green Building Counsel (USGBC).

Cole also notes that “problems with the EEM program stem from the fact that it is a conforming loan product and can only fund loans up to $417,000, requires mortgage insurance and does not have preferred rates. While there are many green homes today, most of them would have required loan products that exceed the conforming loan limit. These ‘jumbo’ loans can easily be funded through myEnergyLoan, a national loan program that provides hearty incentives for buyers of green properties regardless of loan size.”

The attraction of innovative ways to deploy capital in this greener direction has begun. Therefore, a more standard certification process for defining when a real estate project is green enough to meet generally-accepted criteria is being refined. As far as uniformity in loans is concerned, Mike Italiano’s Institute for Market Transformation to Sustainability out of Washington D.C., a group of balanced, nonpartisan and nonprofit members, along with his other group of investment banks, investors, governmental authorities and non-governmental organizations known as The Capital Markets Partnership, will soon be launching a national green building underwriting standard. “These standards will bring new business opportunities for the residential market,” says Italiano. “Once this set of underwriting standards is ironed out and then adopted by financial institutions, the market will be able to recognize the added value of green properties and their substantially-reduced costs.”

Green builders are only beginning to build more green housing, but greater financial incentives will need to be provided to spur more of this activity. Some of those incentives are already available in the form of government cash subsidies, tax credits and rebates that can be obtained from the installation of affordable systems like energy-efficient windows. When the presidential election is finally over, the next administration, along with the Congress, will undoubtedly come up with new policies and programs that will have greater economic incentives directed toward energy savings and greener buildings. Perhaps even our own county tax policies could include a new green real estate property tax exemption similar to the homeowner’s tax exemption to further encourage this process along.

The number of investors compelled to invest in eco-friendly initiatives and socially responsible companies are on the rise. Mutual funds already exist to provide that certain feel-good quality beyond the expected economic returns. These sources of equity will soon build over time to create larger pools of money seeking out green investment opportunities. Equity funds specifically seeking to place capital in green building projects are in the works. Despite all the bad news continuing from major financial institutions lately, the debt malaise will pass and the development of green mortgage and equity programs will continue.

As the cost of energy continues to increase around us, the potential energy from that building capital reservoir behind that dam builds pressure for its release. The right innovations in green buildings with the right leadership will creatively open the flow of capital for an array of solid green real estate projects. When that flow opens up, and it will, it will be a gusher. This gusher will leave us all with a smarter, cleaner and brighter future than the one that will be left behind by oil.

FREDRIC B. PROHOV, J.D., LEED AP, IS AN ATTORNEY PRACTICING IN CHICAGO FOR NEARLY 30 YEARS IN THE AREAS OF REAL ESTATE, SECURED LENDING AND EQUITY FINANCE. PROHOV OBTAINED A LEED AP DESIGNATION FROM THE USGBC IN 2004. CONTACT HIM AT RPROHOV@PAALAW.COM.